Interest-only mortgages look set to be phased out

The days look numbered for interest-only mortgages after Lloyds Banking Group said it will cap them at £500,000.

The move, which means that anyone wanting to borrow more than that sum from Lloyds must take out a repayment loan, is set to be copied by other lenders.

Nationwide is already reviewing its interest-only range whilst Santander has cut the LTV on interest-only products from 85% to 75%.

Melanie Bien, of Savills Private Finance, said lenders see interest-only mortgages as extremely risky. “There will be fewer and fewer of them and they could eventually disappear.”

David Hollingsworth, of London & Country, said that the move by Lloyds – which is 41% owned by the taxpayer – is the start of a trend and signalled where the market is going. “For millions of people, it’s a wake-up call: how exactly are you going to repay your mortgage?”

For borrowers on interest-only mortgages, there are big savings. Many would struggle to find the extra money – typically, £300 more a month on a 25-year £150,000 mortgage – to service a repayment mortgage.

However, upmarket estate agents shrugged off the Lloyds clampdown.

In Knightsbridge, London, W.A. Ellis, deals almost exclusively in properties worth over half a million pounds and mortgages of over £500,000 are not unusual.

Partner Simon Godson said: “In principle and on paper it makes sense to do this under the banner of responsible lending, and I don’t think that the taxpayer should be backing highly leveraged deals.
 
“This should be left to specialist lenders who will no doubt be delighted to step in and assist disappointed Lloyds customers. Borrowers will simply choose lenders with more flexible lending policies.”